Thanks to the complete lockdown announced by the government to control the spread of COVID-19, June quarter earnings were expected to be a washout.
Lockdown was announced towards the end of March and continued till late May. Only essential services were allowed during this phase. Post that, the government allowed economic activities in a phased manner. Unlock 1.0 started on June 1.
Many companies resorted to work-from-home policies leading to increase in internet usage, data consumption. The demand for essential commodities was also higher since people were stocking up on household items, and the focus was on maintaining good health. These helped companies report better-than-expected to in-line results.
"At the index level, excluding banks & NBFCs and a couple of commodity players that are yet to announce quarterly results, topline fall was limited to 33 percent YoY. This represents resilience of India Inc. in challenging times with key sectors like IT actually growing YoY and arresting the topline decline," ICICI Direct said.
With bulk of people working from home and increased reliance on connectivity i.e. both data, voice, telecom sector actually outperformed with sales growing around 14 percent YoY thereby enabling smooth corporate functioning and validating the proverb "Data is the new Oil", the brokerage added.
Even the profit decline was restricted, thanks to lower tax rate used by companies, though depreciation and interest charge continued.
On the profitability front, at the index level, operating profit decline for Q1FY21 was limited to 29 percent YoY led by around 100 bps expansion in EBITDA margins to 16.5 percent, largely driven by lower raw material costs at key oil refiners amid around 38 percent QoQ decline in average crude prices and elevated retail fuel prices, said the brokerage, adding in Q1FY21, PAT fell 43 percent YoY, aggravated by higher interest & depreciation charge and partially supported by lower effective tax rate.
In the banking space, key highlight for the quarter was reduction in proportion of moratorium and healthy double digit decline in absolute figures of gross non-performing assets and net NPAs, ICICI Direct said.
Given the resilience of India Inc. in challenging times, improvement in economic data points after unlock and progress in vaccine making, most of brokerages are betting on healthy double digit earnings growth in FY22, though on the back of weak base of FY21. They also hope the market may start inching towards record high if the recovery continues as per estimates.
Going forward, with large macroeconomic data prints signalling path to normalcy, ICICI Direct expects Nifty EPS to grow at a CAGR of 19.4 percent over FY20-22.
The brokerage highlighted five companies that threw surprises in the June quarter earnings and feels these stocks could return 14-33 percent:
Bharti Airtel: Buy | Target: 700 | Return: 33 percent
Key highlight of Bharti Airtel's Q1FY21 performance was ARPU growth of around 1.8 percent at Rs 157 (versus expectation of around 2 percent QoQ decline), in a challenging quarter coupled with continued expansion in India and wireless margins. The overall margin expansion was led by Indian margin, up 160 bps QoQ at 44.3 percent (versus flattish margins expectation) with Indian wireless margins at 40.6 percent, up 140 bps QoQ, largely a function of tariff hike pass through and cost control.
With robust performance amid challenging times, Airtel is one of the better placed telecom players. We see the favourable industry structure of three players (two being strong), a good enough kicker for eventual hike in tariff as well as superior digital play in the long term. Current valuations underestimate the massive possibility of growth in a consolidated market and the resilience shown by Airtel so far. We have a buy rating on the stock with a DCF based target price of Rs 700 per share.
Dabur India: Buy | Target: Rs 565 | Return: 14 percent
In Q1FY21, Dabur reported a revenue decline of 12.9 percent with domestic business showing resilience with mere 8.4 percent decline in sales despite manufacturing & supply chain disruptions for most of April. The strong growth of 29.2 percent in healthcare was aided by Chawayanprash, Honey with 700 percent, 69 percent growth, respectively, (on low base considering its off season). Further OTC, ethical portfolio saw growth of 34.4 percent, 10.7 percent, respectively, driven by new launches.
We believe the opportunity in immunity boosting products is more structural & leadership position in Chawayanprash & Honey works as advantage for DIL. Though growth rates in hygiene category may taper down in few quarters, the category is here to stay given consumer habit change for hygiene would continue to grow the category at a certain pace. We see more than 50 percent of sales generating categories on high growth path either with strong consumer demand or high opportunity size. We expect 16 percent revenue growth in FY22 after flat growth in FY21. Moreover, we estimate stable margins & earning CAGR of 11.9 percent in FY20-22E. We maintain buy with revised target price of Rs 565.
Ipca Laboratories: Buy | Target: Rs 2,400 | Return: 18 percent
Ipca Labs' Q1 revenues grew 42.3 percent YoY to Rs 1,534.4 crore due to one-time opportunity of around Rs 259 crore for HCQS/chloroquine supplies in both API & formulation segments. Export formulations grew 89.4 percent YoY to Rs 463.6 crore and API segment grew 72.0 percent YoY to Rs 513.3 crore. Domestic revenues grew 8.1 percent YoY to Rs 489.4 crore. EBITDA margins improved to 38.3 percent versus 18.3 percent in Q1FY20 due to lower operational expenditure. EBITDA grew 198.4 percent YoY to Rs 588.3 crore. PAT grew 244 percent YoY to Rs 445.9 crore amid a strong operational performance and lower tax rate.
Besides strong domestic formulations franchise, Ipca continues to thrive on exports front, both in formulations, APIs. Going ahead, with firm growth tempo in domestic formulations, good prospects both for API exports, formulation exports, we expect further improvement in financial parameters. Ipca will continue to remain a compelling bet on the back of well-rounded future growth prospects. We assign buy and value Ipca at Rs 2,400.
VST Tiller & Tractors: Buy | Target: Rs 1,980 | Return: 23 percent
VST reported a healthy Q1FY21 performance with double digit EBITDA margin profile at 11.2 percent versus less than 5 percent in FY20. Farm sentiments are bullish domestically with VST seeing healthy demand for its product profile. VST has guided for healthy double digit volume growth in both tractor, power tiller segments for FY21E. Given power tiller being a subsidy driven product, more and more farmers are buying power tiller on cash basis (around 58-59 percent in July 2020) and not withholding purchase for want of state subsidies, a big positive surprise.
VST is currently in a sweet spot of robust demand prospects of its product segments, import restrictions in power tiller segment and steady improvement in margin profile. It also possesses a healthy balance sheet (cash rich) with history of consistent positive CFO generation. With volume uptick (13 percent CAGR over FY20P-22E) and recovery of margin profile, earnings & RoCE are expected to witness smart recovery at VST. Hence, we have a buy rating and value it at Rs 1,980 i.e. 22x FY22E EPS of Rs 90.
Zydus Wellness: Buy | Target: Rs 1,925 | Return: 19 percent
Zydus Wellness (ZWL) posted 13.4 percent revenue fall given manufacturing, supply chain operations were disrupted in April. However, with manufacturing, supply chain stabilising, June saw double digit growth. ZWL has been trying to fill gaps in its malt beverage portfolio by introducing toddler health drink 'Complan Nutrigro’, 75 gm Complan sachet. Further, it has launched Glucon-D Immuno volts that would be marketed as an immunity boosting brand. ZWL is looking to grow sales in the second summer (September-October), which would help reduce the seasonality in Glucon D. By launching ‘Nutralite Choco Spread’, it is trying to expand Nutralite brand through ‘at-home’ consumption.
We believe higher number of new launches increases the chances of getting more brands on the growth path. We expect revenue CAGR of 7.5 percent to Rs 2041.4 crore in FY20-22E. With SMP prices declining sharply, we expect gross margins to improve 50 bps in FY21E. The company spends around 13 percent of sales as A&P. ZWL would rationalise media spends by increasing its share of voice through digital media platforms. We expect operating margins to expand 380 bps to 22.0 percent in FY20-22E. We estimate adjusted earning CAGR of 30.6 percent in FY20-22E. ZWL is quoting at 29.2x FY22E earnings. We value the stock at 35x FY22E EPS and maintain buy with target price of Rs 1,925.
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